Bloomberg's decisive forex push

In its 10 years' existence, EBS had never made a more significant announcement. At the end of last month, the bank-backed forex trading network, whose interdealer platform transformed price transparency in its market, said it would begin offering dealer-to-client forex trading on Bloomberg.

The agreed partnership package combines trading with market data and puts EBS capabilities on Bloomberg's 175,000 terminals, giving it an enviable new distribution network. Or, as Cliff Lewis, CEO of forex trading network Currenex, says: "EBS is the 800lb gorilla in our space... The gorilla has woken up."

The move is rather counter-intuitive. If you listen to forex bankers, technology firms, and trading portals, the next wave of consolidation among multibank distribution networks is just around the corner. And then along comes a major new player.

EBS Trader, the trading network that will be launched on Bloomberg, is in itself not new. It has been a standalone web-based offering for about 18 months. It enables users to view spot prices, chat to each other electronically, and complete trades on a conversational basis, which means that both sides agree a price and execute the trade. The two sides of the trade are usually banks and clients. Credit issues aside, though, there is nothing to stop two corporates from trading directly with each other.

The new distribution agreement is clearly good news for EBS. It does not compromise its highly regarded interbank trading platform, as that will remain a standalone product for the big forex banks, which use it to trade with each other at tiny spreads. The dealer-to-client trading platform, EBS Trader, will take those interbank prices, add a spread through an algorithm, and display them to end-users, including funds and corporates. When an end-user decides to trade, the banks are not obliged to execute at the price that appears on the screen - the price is decided during the electronic conversational process.

So EBS's core business, interbank spot trading, remains sacred and separate. But it gets market data and a distribution network that rivals must privately envy. The announcement is also good news for forex clients, as they get high-quality data and trading that is fully enabled for straight-through processing. In fact, the platform can trade any product - not just forex-related products such as forwards and options - and could move into money-markets products, fixed income and beyond.

Jack Jeffery, chief executive at EBS, says that in approving buy-side clients to transact on the EBS Trader network, EBS is not being forced to target completely new types of clients. "We have had a fair amount of contact with them before. Many corporates, CTAs and hedge funds see themselves as peers to the banks. We are constantly asked: 'If that investment bank qualifies, why don't I?' Banks are concerned about that."

When EBS Trader launches on Bloomberg - the schedule is for September - it will certainly make a splash, as it will be exposed to so many potential users.

Other forex trading platforms are keen to stress that they are confident in their future but EBS's new alliance does throw their future into doubt, partly because of the volumes it is likely to attract and partly because, as a bank-backed venture, it enjoys the support of many of the banks that are also shareholders or liquidity providers for other networks. If EBS on Bloomberg takes off, the willingness to support other networks could evaporate. Or so the theory goes.

FXall says it is unfazed. It is generally highly regarded, and having already built healthy, if not spectacular volumes, its focus is now on post-trade services such as confirmation and straight-through processing. Later this year it also hopes to use its network to share information between banks for prime brokerage. Its trading model relies on automated quoting and execution by banks based on a request-for-quote system. That, plus its ancillary services, distinguishes it from the forthcoming Bloomberg product. "Conversational dealing functionality is not new," says Mark Warms, chief marketing officer at FXall, referring to the EBS trading model. "Our customers continue to look for ways to further automate their foreign exchange workflow, and requests for conversational dealing have not been part of those discussions."

There is almost certainly enough space for them both, and more besides. In very broad terms, FXall and other request for quote-driven, auto-execution platforms work best for highly automated, small, plain-vanilla trades, whereas conversational dealing may be more appropriate for bigger or more unusual trades, or for those trades that clients don't want to expose to lots of different banks. EBS Trader enables them to perform these trades electronically, with a full audit trail and straight-through processing.

The company that is surely the most concerned about being replaced here is Reuters. EBS started distributing market data on Reuters in 1998, and will continue to do so even after the Bloomberg launch. Yet when EBS chose a partner, it chose Reuters' arch-rival. Jeffery says that this was the best market data partner in terms of content and competitive position.

The project is a real boon for Bloomberg, which will integrate EBS Trader into its existing news, data and trading systems rather than running it separately. This is the first time that it will offer a conversational dealing tool in forex. "This was the last big piece for us," says Andrew Hausman, who has managed the EBS project for Bloomberg in New York. "We are known for our analytics and our market data, but this kind of FX trading was a hole. This is a great product."

Suddenly, traders and buy-side clients have a much more compelling reason to use Bloomberg than Reuters. And they have much less reason to pay for access to Reuters to view EBS market data, putting more pressure on Reuters, which slashed 3,000 jobs earlier this year. This deal will propel EBS Trader into a completely new space and open up opportunities in terms of client reach that it did not have before. But make no mistake - the real winner here is Bloomberg.